You cannot claim a child as a dependent unless that child is a "qualifying child". A qualifying child includes your natural children, stepchildren, and foster children, among others, who are under age nineteen at the end of the year (or any age if permanently and totally disabled). The child must have lived with you for more than half the year and must not have provided more than half of his or her own support for the year. In addition, the child must not be filing a joint return for the year with any other person. The question of who can claim the child as a dependent is important because only one person can claim the qualifying child and receive tax benefits such as: child tax credit, head of household filing, the earned income, the exclusion from income for dependent care benefits, etc. In the case of children of divorced or separated parents, in the absense of a written agreement it is the person who has the children living with him or her for the majority of the year.
What if we agree about who claims the children?
If the parents agree that the custodial parent won't claim the children, that parent must sign a written declaration indicating that he or she won't claim the children as dependents for the year and the noncustodial parent must attach the declaration to his or her return. Parents can agree to alternate claiming the children. In addition, in Colorado, the court can order the parents to alternate claiming the children and will often allocate exemptions in proportion to incomes under Colorado law. Thus, the person with the higher income should be able to claim the children as exemptions more often than the other parent. In Colorado, a person is not entitled to claim the children if he or she is behind on child support, or if the exemption would not result in a tax benefit. A person who is behind on his or her child support payments may also end up having the state take their federal and state income tax refunds. The money is then applied to child support arrearages.
Who can claim head of household?
Married taxpayers who are separated or estranged from their spouses may be able to file as Head of Household, even though they are not legally separated or divorced. Taxpayers who meet all five criteria below may file as Head of Household instead of the less favorable married filing separately status.
a) You file a separate return.
b) You paid for more than half the cost of keeping up your home for the tax year.
c) Your spouse did not live in your home during the last six months of the tax year. Your spouse is considered to live in your home even if he or she is temporarily absent due to special circumstances.
d) Your home was the main home of your child, stepchild, or eligible foster child for more than half the year.
e) You must be able to claim an exemption for the child. However, you meet this test if you cannot claim the exemption only because the noncustodial parent can claim the child using the rules for children of divorced or separated parents.
Who gets the Child Tax Credit?
The Child Tax Credit is an important tax credit that may be worth as much as $1,000 per qualifying child depending on your income. For the most part, a qualifying child for this credit is the same as a qualifying child for purposes of the dependency exemption described above except that the qualifying child must be under age 17 at the end of the tax year. Note that if the amount of your Child Tax Credit is greater than the amount of the income tax you owe, you may be able to claim the Additional Child Tax Credit.
Who can deduct the children's day care?
The person who is Head of Household (also the custodial parent) is the one who is permitted to deduct the chidren's daycare expenses. This is important to know so that the non-custodial parent does not pay for daycare directly and lose the ability to deduct those amounts.
Who can deduct the children's medical expenses?
Medical expenses may be deducted only by the person who paid them.
Is child support deductible?
Child support is not tax-deductible to the paying parent. Only maintenance is deductible to the payor.
Will I have to pay taxes on it if I receive my spouse's retirement plan in the divorce?
The transfer of retirement plan assets from one spouse to another is not a taxable event if it is made incident to divorce. The receiving spouse may also take a lump sum distribution from the retirement plan without incurring the 10% penalty on early withdrawals provided that the distribution is made pursuant to a Qualified Domestic Relations Order. Note that any early distribution from a retirement plan will still be taxed to the recipient as ordinary income.
May I deduct my attorney fees I paid for in my divorce?
Attorney fees paid in connection with divorce are generally only deductible to the extent that they are incurred for tax advice. This may include advice regarding taxability of maintenance/child support, negotiations/discussions regarding allocation of paid and unpaid taxes in a separation agreement, issues related to retirement plans, and drafting of those provisions in a separation agreement. Newly-divorced individuals should seek the advice of a tax professional prior to deducting any attorney fees incurred in a divorce.
If my spouse and I are getting a divorce, how should we file taxes?
You file according to your status as of the last day of the tax year. Thus, if you are married on December 31st, you must file as married. If you are single of December 31st, you will file as single. If you are still married at the end of the year, there are a lot of things to consider when deciding whether to file jointly or not. For most people, the combined taxes will be less if taxes are filed jointly. However, if you are not 100% sure that your spouse is being completely forthcoming on his or her portion of the tax return, don't file together. If there is a liability incurred as a result of your spouse's misrepresentations on a jointly-filed return, you will be jointly responsible. Some low income individuals who are divorcing higher income earners and who usually receive an income tax refund may want to file separately to get that refund check in their name only. Remember that if you do that, the refund money is still "marital property" and will be split equally.